The police came for them at dawn on a Sunday, heavily armed, wearing helmets and riot shields as they broke down the metal doors of the houses and dragged the two Palestinian families out onto the streets.

It was over in minutes, the Hanoun and the Ghawi families evicted from what had been their homes for the past five decades, and thrown onto the pavement before the sun had fully risen.

Within hours young, religious Israeli settlers had been moved in, guarded by dozens of armed police and their own private armed security guards.

These streets of Sheikh Jarrah, in East Jerusalem, have become the new front line in Israel's complex battle to extend its control over this divided city; their latest victims 17 members of the Hanoun family and 38 from the Ghawi family.

Both families now sleep on mattresses on the street outside their homes and spend the day sitting in the shade watching settlers walk in and out of their front doors.

"I don't know how they sleep," said Maher Hanoun, 51. "We were here in our house legally. That is the important thing."

It was the second time he has been evicted from the house, but the first time settlers have moved in.

Around the corner sat Nasser Ghawi, 46, facing the same situation. "I am dying a hundred times a day," he said. "This is my house, this is what's left of my furniture. I have no other place to go. This is where I was born."

Israel insists these were apolitical evictions, carried out as a result of court rulings after years of legal hearings and a result of the fact that both the Hanouns and the Ghawis had not paid their rent for years.

Two weeks earlier the Israeli prime minister, Binyamin Netanyahu, had told his cabinet that Jerusalem was "the capital of the Jewish people and of the state of Israel" and that "our sovereignty over it cannot be challenged."

"We cannot accept the idea that Jews will not have the right to live and purchase in all parts of Jerusalem," he said.

But Jerusalem is not a city like any other. The evictions triggered an unusually strong international protest. The US secretary of state, Hillary Clinton, called the evictions "deeply regrettable". The British consulate said it was "appalled" and that the evictions were "incompatible with Israel's professed desire for peace". Robert Serry, the top UN official in the Middle East, called them "totally unacceptable" and a breach of the Geneva Conventions.

The Hanouns and Ghawis fled or were forced out by the 1948 war from their homes in what became Israel. In 1956 the two were among 28 Palestinian refugee families who were given houses in Sheikh Jarrah, then under Jordanian control.

Under an agreement at the time between the families, Jordan and the UN agency for Palestinian refugees, they gave up their right to a lifetime of refugee aid in return for paying a token rent for three years before the properties would transfer to their ownership. That transfer never happened.

In 1967 Israel captured and occupied East Jerusalem and later annexed it – a move never recognised by the rest of the international community. The homes were placed under the control of the Israeli Custodian for Absentee Property.

Then in 1972 two Jewish groups claimed ownership of the properties and began demanding rent. They said they had proof that the land was once owned by Jews in the late 19th century, when a Jewish community was established close to the nearby tomb of Simon the Righteous.

Later a lawyer for the Palestinian families secured an agreement from the court that turned the Palestinians into "protected tenants", under which they were to pay rent to the Jewish groups. The families said they never approved such an agreement and most decided not to pay. "If I had paid rent it would have meant that the Jewish side was the owner," said Ghawi.

In recent years the legal cases against them have gathered pace. Last November, after a court ruling, police evicted one of the families: Mohammad and Fawzieh al-Kurd. Then in May the court ordered the Hanouns and Ghawis to leave their homes as well, finding in favour of the Jewish groups: the Sephardic Community Committee and Nahalat Shimon International.

However, because East Jerusalem is occupied, Israel is under legal obligation not to change the status of its residents and not to settle its population on occupied land.

In addition, while in these cases the Israeli legal system was used to support Jewish property claims dating back before 1948 it is never used to support similar Palestinian property claims, otherwise hundreds of thousands of Palestinian refugees and their descendants could stake claims to houses and land they once owned in places like west Jerusalem, Jaffa and Haifa before the creation of Israel.

"The state of Israel needs to reconsider the future consequences of this process, which allows Jews to claim ownership of property that belonged to them before 1948, but prevents the same claims from being realised by Palestinian residents," said Ir Amim, an Israeli organisation that works for a more equitable Jerusalem. "A general opening of ownership cases – Jews and Palestinians — from before 1948 could place the state of Israel in an impossible predicament in Jerusalem."

Or as Ghawi saw it: "It is only a law for the Jewish people … My father has 18 dunams [18,000 sq m] of land near Rishon Lezion [inside Israel]. We've asked for it back, but the Israeli government won't even register our case."

These are unlikely to be the last evictions. Put together they form a pattern of a growing Israeli settler presence stretching deeper into Arab east Jerusalem. Plans already submitted by settler groups show they want to build several hundred new homes in this area. Eventually, if successful, it would form a ring of Jewish settlements around the Old City and would link to a major settlement deep in the West Bank.

"Our strategic plan for the city is one: a belt of Jewish continuity from east to west," Benny Elon, Israel's then tourism minister, said during a tour of Sheikh Jarrah in 2002. It would greatly weigh in Israel's favour any future negotiations over the final borders of the Israeli state.

Mohammad Sabagh, 60, and his four brothers are another of the refugee families of Sheikh Jarrah. They have a court hearing over their case in October and fear eviction. "It's clearly a political case," he said. "They want to build a wall of settlers and eventually no Arabs will be allowed through."